## 1thaea2022001

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### Overview and recent developments
- The economic recovery continues in 2022 but is clouded by the deteriorated global outlook.
- Real GDP:
  - Expanded by -6.2 percent in 2020; 1.5 percent in 2021.
  - GDP expanding by 2.2 percent (y/y) in 2022Q1; real GDP expanded by 2.5 percent (y/y) in 2022Q2.
- Tourism:
  - Over 2 million arrivals in January-June 2022 (0.4 million in 2021).
  - Tourist arrivals exceeded 1 million in July; 2.1 million in January-June.
- Inflation:
  - Headline inflation averaged 1.2 percent in 2021 and accelerated to 5.6 percent y/y during Jan-June 2022.
  - June headline inflation reached 7.7 percent.
  - Inflation moderated slightly to 7.6 percent in July 2022 from 7.7 percent in June (y/y).
- Financial conditions:
  - Bond yields started to increase in March 2022 and financial conditions are tightening.
  - Thai baht depreciated by over 5 percent against the USD in 2022; later depreciated by around 9 percent in the first seven months of 2022; appreciated by 3.8 percent against the U.S. dollar in August (as of August 16).
  - Stock market valuation declined by around 6 percent.

### Macroeconomic projections and key statistics
- Real GDP growth (projections and historicals):
  - 2018: 4.2; 2019: 2.2; 2020: -6.2; 2021: 1.5; 2022: 2.8; 2023: 4.0; 2024: 3.6; 2025: 3.3; 2026: 3.2; 2027: 3.0.
  - Medium term: trend down to about 3 percent (potential rate).
- Inflation (period average):
  - Headline CPI: 2018: 1.1; 2019: 0.7; 2020: -0.8; 2021: 1.2; 2022: 6.1; 2023: 2.5; 2024: 1.5; 2025: 2.3; 2026: 2.0; 2027: 2.0.
  - Core CPI: 2018: 0.7; 2019: 0.5; 2020: 0.3; 2021: 0.2; 2022: 2.6; 2023: 1.7.
- Current account:
  - Current account balance (Percent of GDP): 2018: 5.6; 2019: 7.0; 2020: 4.2; 2021: -2.2; 2022: -0.8; 2023: 2.2; 2024: 3.7; 2025: 3.3; 2026: 3.4; 2027: 3.3.
  - Current account (In billions of U.S. dollars): 2021: -11.0; 2022: -4.2; 2023: 12.5.
- Public sector debt and reserves:
  - Public sector debt (end of period): 2018: 41.9; 2019: 41.1; 2020: 49.5; 2021: 58.4; 2022: 61.2; 2023: 61.4; 2024: 61.2; 2025: 60.9; 2026: 59.4; 2027: 59.6.
  - Gross official reserves (end of period, In billions of U.S. dollars): 2018: 239.4; 2019: 258.7; 2020: 287.4; 2021: 279.2; 2022–2027: 279.2 (projected).
- Selected levels and indicators:
  - GDP per capita (2021): US$7,232.
  - Unemployment rate (2021): 2 percent.
  - Population (2021): 66.2 million.
  - Exchange Rate (2021): 31.98 Baht/USD.

### Inflation dynamics and monetary policy
- Inflation developments:
  - Headline inflation: averaged 1.2 percent in 2021; accelerated to 5.6 percent y/y during Jan-June 2022.
  - Core inflation averaged 1.9 percent during Jan-June 2022, driven by higher prepared food prices.
  - Energy component accounts for 12.4 percent of the CPI basket; electricity and fuel account for 5.5 percent of the CPI basket.
- Policy rate and central bank stance:
  - Policy rate remained at 0.5 percent (historic low) at the time of earlier reporting; BOT raised policy rate by 25 basis points from 0.5 to 0.75 percent at its August 10 Monetary Policy Committee meeting.
  - In June the Bank of Thailand shifted communication from “on-hold for longer” to signaling that a very accommodative monetary policy might be less needed going forward.
  - BOT revised its 2022 inflation projection upwards from 4.9 to 6.2 percent for average headline inflation and from 2.0 to 2.2 percent for core inflation in 2022.
- Financial stability indicators (2022Q2):
  - NPL coverage ratio: 166.6 percent.
  - Liquidity coverage ratio: 185.5 percent.
  - BIS ratio: 19.6 percent.
- Financial conditions:
  - Bond yields increased in 2022; medium-term government bond yields continued to decline later.
  - Net portfolio inflows declined from around US$6 bn in 2022Q1 to US$0.7 bn in 2022Q2.

### External sector, reserves, and FX policy
- External trade (f.o.b., billions of U.S. dollars):
  - Exports: 2021: 270.6; 2022: 301.7; 2023: 312.5.
  - Imports: 2021: 230.7; 2022: 271.9; 2023: 280.9.
- Reserves and intervention:
  - Gross reserves (including net forward positions): US$279.2 billion at end-2021 (55.2 percent of GDP).
  - FX reserves (excluding net forward position) declined by US$12 billion to US$246 billion at end-2021.
  - FX intervention in 2021 estimated to be largely two-sided.
  - Assessment: Given that FX reserves exceed all adequacy metrics, there is no need to build up reserves for precautionary purposes; exchange rate should move flexibly and FX intervention should be limited to avoiding disorderly market conditions.
- External position assessments:
  - NIIP (2021): 9.5 percent of GDP; Gross Assets: 120.1 percent of GDP; Gross Liabilities: 110.6 percent of GDP; External debt: 39.0 percent of GDP.
  - Staff assesses cyclically-adjusted current account gap to be around 0.7–2.1 percent of GDP.

### Fiscal stance and policy guidance
- Fiscal outcomes and projections:
  - General government balance (percent of GDP): 2018: 0.1; 2019: -0.8; 2020: -4.7; 2021: -7.0; 2022: -5.6; 2023: -3.2.
  - Overall fiscal balance (General Government, FY terms, in billions of baht): FY2018–FY2023 excerpt: 10.4; -137.1; -747.7; -1124.2; -947.8; -563.2.
  - Authorities envisage a 1.2 percent of GDP reduction in the fiscal stimulus in FY2022 compared with FY2021.
- Fiscal policy recommendations:
  - Near-term fiscal consolidation is appropriate while continuing targeted support to vulnerable groups.
  - Over the medium term, pursue more gradual fiscal consolidation underpinned by enhanced domestic revenue mobilization.
  - Gradual replacement of untargeted energy subsidies with targeted support to vulnerable groups.
  - Boost revenue mobilization: Thailand’s tax effort is estimated at 46 percent compared with an average middle-income country effort of 64 percent; raising tax effort to the average could increase tax revenue by up to 6 percent of GDP.
  - Specific tax measures: frontload tax-base expanding reforms; consider increasing VAT (currently at a low 7 percent) once recovery is entrenched; reform CIT and PIT; develop property taxation.
- Alternative fiscal scenario (staff advice):
  - Growth-friendly base-broadening revenue enhancement of about 5.8 percent of GDP cumulatively over the medium term (implying a 2.2 percentage points higher revenue-to-GDP ratio in 2027 compared to 2021).
  - Spending recommendations cumulative: new public investments 2.8 percent of GDP; climate adaptation 2.1 percent of GDP; vocational training and education 1 percent of GDP; expanded targeted transfers and age-related spending 1.6 percent of GDP.
  - Debt dynamics under staff scenario: debt-to-GDP ratio peaks at 62.5 percent in 2023 before declining to about 59.7 percent by 2027.

### Financial sector, vulnerabilities, and policy measures
- Banking system indicators and credit:
  - Banking system remains profitable, liquid, and adequately-capitalized with low NPLs (3 percent); loan loss provisions at end-2021 implied an NPL coverage ratio of about 163 percent (from 144 percent in Q2 2020).
  - Credit to the private sector expanded by 4.5 percent in 2021Q4 and 4.3 percent in 2022Q1; credit expansion mostly driven by large corporates; SME credit increased supported by soft loan program.
  - Corporate debt increased by about 2 percentage points to about 79 percent of GDP in 2021.
  - Household debt remained stable at about 90 percent of GDP in 2021; mortgage loans account for about 35 percent of total household debt at end-2021.
- Loans under relief (LUR):
  - Halved to 17 percent of total loans at end-2021 compared with mid-2020.
  - Declined to about 14 percent in 2022Q1; loans under credit assistance decreased to 2.9 trillion baht in May 2022 from 3.5 trillion baht at end-2021 and from peak of 7.2 trillion baht in July 2020.
- Recommended financial measures:
  - Timely asset quality reviews of LUR to identify non-viable borrowers, particularly for SFIs.
  - Accelerate household debt restructuring; strengthen insolvency regime by adding informal and hybrid restructuring options.
  - Complementary macroprudential measures: lower debt thresholds, stronger lending standards informed by comprehensive credit information systems and a broad-based DSTI ratio; remove relaxation of LTV ratio by end-2022 as intended.
  - Gradually unwind policy interventions while strengthening risk analysis and bank resolution toolkit.
- Repositioning for digital and sustainable finance:
  - Develop taxonomy for sustainable finance, promote regulatory sandboxes, continue research on CBDCs, regulate crypto assets, and emphasize financial risks from natural disasters.

### Socio-economic outcomes, labor market, and structural priorities
- Employment and social support:
  - Unemployment rate rose to 2 percent in 2021 from 1.7 percent in 2020 reflecting increased participation rates.
  - Low-skilled workers continued to face weak outcomes; female employment recovered faster than male.
  - Without government support poverty would have doubled in 2020; social assistance schemes reached more than 80 percent of households (estimate: 81.5 percent).
- Structural priorities:
  - Implement coordinated structural reforms to boost potential output and capitalize on digital and green transformations.
  - Enhance human capital to close the skills gap; increase investments in digital infrastructure and R&D; ease business regulations.
  - Scale up public spending on education and training (STEM and vocational), public investment in ICT and green resilient infrastructure, and expand social protection coverage while ensuring sustainability.

### Risks, scenarios, and recommended policy posture
- Principal downside global risks:
  - Prolonged war in Ukraine could further raise commodity prices, weigh on private consumption and external demand.
  - Disorderly tightening of global financial conditions could derail the economy’s rebound.
  - Spillovers from a sharper growth slowdown in China; a 1 percent decline in China’s GDP estimated to lower Thailand’s output by about 0.2 percent.
  - De-globalization and geopolitical tensions could adversely affect trade-dependent manufacturing sectors.
- Domestic risks:
  - Elevated private leverage and concentrated pandemic-hit sectors; financial sector stress could amplify scarring.
  - Lack of reforms and political fragmentation could widen income disparities and pose fiscal and productivity challenges amid fast-aging population.
- Staff recommended policy posture:
  - Monetary: Data-dependent monetary policy normalization to avoid de-anchoring inflation expectations; BOT should monitor inflation closely and react timely to generalized price pressures; consider earlier normalization if warranted.
  - Fiscal: Gradual withdrawal of pandemic-era stimulus while protecting vulnerable groups; pursue revenue mobilization to support medium-term consolidation and reforms.
  - Financial: Accelerate private debt restructurings, address insolvency regime gaps, apply macroprudential measures where needed.
  - Structural: Upskill labor force, invest in digital infrastructure and R&D, ease business regulations, coordinate reforms with capacity development support.
- Integrated policy in adverse scenarios:
  - Monetary tightening to bring inflation back to target, complemented by discretionary fiscal support using remaining fiscal space followed by gradual consolidation.
  - Exchange rate should act as shock absorber with FXI limited to disorderly market conditions; in severe scenarios complementary use of FXI with interest rate hikes may be appropriate.
  - Comprehensive package including fiscal stimulus (e.g., discretionary increase of 2 percent of GDP) could limit output gap deterioration but would raise public debt (total public debt could peak near almost 67 percent of GDP in 2024-25 under one illustrative package).

### Digitalization, climate policy, and medium-term reform agenda
- Digitalization and productivity:
  - Thailand to leverage digitalization to move toward more sophisticated manufacturing and innovative services’ exports.
  - Policy actions: expand R&D and access to digital technologies, upskill workers, liberalize services (reduce sectors requiring foreign business license), ramp up public investment in IT and digital infrastructure, leverage EEC.
- Climate mitigation and fiscal implications:
  - Long-term strategy: carbon neutrality in 2050 and net zero in or before 2065.
  - Staff simulation: a US$50 carbon price, gradual phasing out of subsidies and use of carbon tax revenues to finance investments and targeted transfers can boost long-run output by about 2 percentage points versus baseline.
  - Priorities: invest in climate-resilient infrastructure, address water scarcity and soil degradation, invest in R&D for green growth.
- Authorities’ measures and coordination:
  - NESD plan priorities: labor reskilling, leveraging digitalization, promoting green transformation.
  - Initiatives: E-Workforce Ecosystem platform, Education to Employment scheme, long-term residence visa for highly-skilled professionals, EEC regulatory sandbox, incentives for renewable energy and carbon considerations in vehicle taxes.

### Policy support during the pandemic (Annex I) — key measures and timelines
- Fiscal support:
  - Additional 2.3 percent of GDP fiscal stimulus in 2021 (on top of 2020).
  - Overall deficit widened to 7.4 percent of GDP in 2021.
  - Public debt increased to 58.1 percent of GDP.
- Monetary accommodation:
  - BOT kept policy rate at 0.5 percent in 2021; recent rise in inflation pushed real rates lower.
- Targeted financial support:
  - BOT soft loan schemes: 500 billion baht for SMEs (interest up to 2 percent per year).
  - GSB soft loan guarantee schemes of 150 billion baht (max 2 percent interest per year).
  - TCG credit guarantee schemes: 150 billion baht (August 2020) and 175 billion baht (October 2021).
  - BOT soft loan plus additional TCG guarantee of 57 billion baht.
  - Cabinet-approved THB 50 billion soft loan program (available until June 30, 2021) for informal workers and SMEs linked to tourism.
  - Two post-2020 transformation measures (April 2021): special loan facility with credit guarantee (250 billion baht) and asset warehousing (100 billion baht) with buy-back options.
- Debt relief and borrower assistance:
  - Broad-based Debt Payment Holiday Schemes (April–October 2020); DR BIZ Project (August 2020); Debt Clinic; Debt Exit Fastlane; Debt Consolidation Schemes; Debt Mediation events.
  - Debt Clinic helped resolve around 87,000 accounts with success rate of 88 percent; Debt Mediation Fair processed more than 231,000 accounts with a 75 percent success rate.
- Regulatory relief:
  - BOT reduced FIDF contribution to 0.23 percent of deposit base per annum from 0.46 percent until December 2022.
  - Restrictions on dividend payments and eased eligibility for AT1 and T2 regulatory capital; temporary easing of LTV regulations (October 2021).
  - Debtors in need can access special loan facility and asset warehousing program which will continue until April 2023.

### Data compilation, standards, and key data notes
- Data sources and dissemination:
  - NESDC introduced new quarterly GDP current price and chain-linked volume estimates in May 2015.
  - BTEI compiles monthly CPI with weights from 2015 Socio-Economic Survey since January 2017; index coverage restricted to middle-income urban households; publishes aggregate indexes for low-income and rural populations.
  - BOT compiles and disseminates BOP and IIP quarterly following BPM6; quarterly BOP and IIP available for 2022Q1.
  - Thailand is a subscriber to the Special Data Dissemination Standard (SDDS) since August 9, 1996.
- Key data reporting frequencies and latest observations (selected):
  - Exchange Rates: Date of Latest Observation 6/27/2022.
  - International Reserve Assets: Date of Latest Observation 6/22/2022.
  - Consumer Price Index: Date of Latest Observation 5/2022.
  - GDP/GNP: Date of Latest Observation 2022: Q1.
  - Gross External Debt and IIP: Date of Latest Observation 2022: Q1.

*Source: IMF staff report for Thailand, Article IV Consultation, August 30, 2022.*

### 5.9 percent y/y during Jan-July 2022 from a 1.2 percent average inflation recorded in 2021.

### 1thaea2022001 - 5.9 percent y/y during Jan-July 2022 from a 1.2 percent average inflation recorded in 2021.

### Overview and recent developments
- The economic recovery continues in 2022 but is clouded by the deteriorated global outlook.
- GDP expanded by 1.5 percent in 2021 after a -6.2 percent contraction in 2020.
- GDP growth momentum continued in 2022 with GDP expanding by 2.2 percent (y/y) in 2022Q1.
- Tourism: over 2 million arrivals in January-June 2022 (0.4 million in 2021).
- Headline inflation averaged 1.2 percent in 2021 and accelerated to 5.6 percent y/y during Jan-June 2022 driven by rising energy prices.
- June headline inflation reached 7.7 percent, its highest level in 14 years.

### Macroeconomic projections and key statistics
- Real GDP growth (projections):
  - 2022: 2.8 percent
  - 2023: 4.0 percent
  - Medium term: trend down to about 3 percent (potential rate)
- Inflation:
  - Headline CPI (period average): 2022: 6.1 percent; 2023: 2.5 percent
  - Core CPI (period average): 2022: 2.6 percent; 2023: 1.7 percent
- Current account:
  - Expected to narrow to -0.8 percent of GDP in 2022
  - Expected to return to a surplus of around 3-3.5 percent of GDP over the medium term
- Selected table figures (2018–2023 highlights):
  - Real GDP growth (y/y percent change): 2018: 4.2; 2019: 2.2; 2020: -6.2; 2021: 1.5; 2022: 2.8; 2023: 4.0
  - Headline CPI (period average): 2018: 1.1; 2019: 0.7; 2020: -0.8; 2021: 1.2; 2022: 6.1; 2023: 2.5
  - Current account balance (In percent of GDP): 2018: 5.6; 2019: 7.0; 2020: 4.2; 2021: -2.2; 2022: -0.8; 2023: 2.2
  - Public sector debt (end of period): 2018: 41.9; 2019: 41.1; 2020: 49.5; 2021: 58.4; 2022: 61.2; 2023: 61.4
  - Gross official reserves (end of period, In billions of U.S. dollars): 2018: 239.4; 2019: 258.7; 2020: 287.4; 2021: 279.2; 2022: 279.2; 2023: 279.2

### Inflation dynamics and monetary policy
- Inflation developments:
  - Headline inflation: averaged 1.2 percent in 2021; accelerated to 5.6 percent y/y during Jan-June 2022.
  - Core inflation averaged 1.9 percent during Jan-June 2022, largely driven by higher prepared food prices.
  - Energy component accounts for 12.4 percent of the CPI basket; electricity and fuel account for 5.5 percent of the CPI basket.
- Policy rate and central bank stance:
  - Policy rate remained at 0.5 percent (historic low) at the time of reporting.
  - In June the Bank of Thailand shifted communication from “on-hold for longer” to signaling that a very accommodative monetary policy might be less needed going forward.
  - BOT revised its 2022 inflation projection upwards from 4.9 to 6.2 percent for average headline inflation and from 2.0 to 2.2 percent for core inflation in 2022.
- Financial conditions:
  - Bond yields started to increase in March 2022 and financial conditions are tightening.
  - Thai baht depreciated by over 5 percent against the USD in 2022.
  - Stock market valuation declined by around 6 percent.

### External sector and fiscal stance
- External:
  - Exports, f.o.b. (billions of U.S. dollars): 2021: 270.6; 2022: 301.7; 2023: 312.5
  - Imports, f.o.b. (billions of U.S. dollars): 2021: 230.7; 2022: 271.9; 2023: 280.9
  - Current account (In billions of U.S. dollars): 2021: -11.0; 2022: -4.2; 2023: 12.5
- Fiscal:
  - General government balance (percent of GDP): 2021: -7.0; 2022: -5.6; 2023: -3.2
  - Public sector balance (percent of GDP): 2021: -7.4; 2022: -6.2; 2023: -3.0
  - Public sector debt (end of period): 2021: 58.4 percent of GDP; 2022: 61.2 percent of GDP; 2023: 61.4 percent of GDP
- Policy guidance:
  - Near-term fiscal consolidation is appropriate, while continuing targeted support to vulnerable groups.
  - Over the medium term, a more gradual fiscal consolidation underpinned by enhanced domestic revenue mobilization is recommended to support structural reforms and rebuild buffers.
  - Gradual replacement of untargeted energy subsidies with targeted support to vulnerable groups is encouraged.

### Financial sector, vulnerabilities, and structural priorities
- Financial sector:
  - Continued progress in strengthening financial sector risk analysis, specialized financial institutions’ supervision and bank resolution is welcomed.
  - Accelerate household debt restructuring, complemented by a gradual tapering of financial sector support measures.
  - Macroprudential measures are recommended to limit excessive private leverage and related financial stability risks.
- Structural priorities:
  - Implement a well-coordinated structural reform agenda to boost potential output and capitalize on digital and green transformations.
  - Enhance human capital to close the skills gap; increase investments in digital infrastructure and R&D; ease business regulations.
  - Reposition Thailand’s financial sector for a sustainable, digital economy while balancing efficiency gains from financial innovation against financial stability risks.
  - Enhance fiscal governance and transparency.

### Risks, scenarios, and staff recommendations
- Downside risks highlighted:
  - Prolonged war in Ukraine could further raise commodity prices, weigh on private consumption and external demand.
  - A disorderly tightening of global financial conditions could derail the economy’s rebound.
  - Spillovers from a sharper growth slowdown in China amidst already-stretched private sector balance sheets could derail the rebound.
  - Growth prospects critically hinge on the return of foreign tourists.
- Recommended policy posture:
  - Monetary: Data-dependent monetary policy normalization to avoid de-anchoring inflation expectations; BOT should monitor inflation closely and react timely to generalized price pressures.
  - Financial: Accelerate private debt restructurings and address insolvency regime gaps; apply macroprudential measures where needed.
  - Fiscal: Gradual withdrawal of pandemic-era stimulus while protecting vulnerable groups; pursue revenue mobilization to support medium-term consolidation and reforms.
  - Structural: Upskill labor force, invest in digital infrastructure and R&D, ease business regulations, and coordinate reforms supported by capacity development.

*Source: IMF staff report for Thailand, Article IV Consultation, August 30, 2022.*

### 6.      The pandemic has led to highly-differentiated socio-economic outcomes across sectors

### 6.      The pandemic has led to highly-differentiated socio-economic outcomes across sectors

### Socio-economic outcomes and labor market
- Overall employment expanded, but the unemployment rate rose to 2 percent in 2021 from 1.7 percent in 2020 reflecting increased participation rates to compensate for the decline in family incomes.
- Employment outcomes:
  - Low-skilled workers: continued to be weak.
  - Female employment: recovered faster than male, though female employment was initially more impacted.
- Government support mitigated impacts on poverty and inequality:
  - Without government support poverty would have doubled in 2020.
  - Social assistance schemes are estimated to have reached more than 80 percent of households.

### Financial sector performance and vulnerabilities
- Banking system status:
  - Remains profitable, liquid, and adequately-capitalized with low NPLs (3 percent), though this reflects policy support and relaxation measures.
  - Loan loss provisions at end-2021 implied an NPL coverage ratio of about 163 percent (from 144 percent in Q2 2020).
  - Liquidity coverage ratio stood at 189 percent at the end of 2021.
- Credit developments:
  - Credit to the private sector expanded by 4.5 percent in 2021Q4 and 4.3 percent in 2022Q1 (though turning negative in real terms in 2022Q1).
  - Expansion mostly driven by large corporates; SME credit also increased, supported by the soft loan program.
- Private sector leverage and debt levels:
  - Corporate debt increased by about 2 percentage points to about 79 percent of GDP in 2021.
  - Household debt remained stable at about 90 percent of GDP after a sharp rise in 2020.
  - Mortgage loans account for about 35 percent of total household debt at end of 2021 in Thailand.
- Loans under relief (LUR):
  - Halved to 17 percent of total loans at end-2021 compared with mid-2020.
  - Declined to about 14 percent in 2022Q1 owing to the economic recovery and increased targeting of support measures.
  - LUR are credit assistance measures to support borrowers affected by COVID-19; they target performing loans and some non-performing loans.
- Vulnerabilities:
  - Many firms in sectors hit hard by the pandemic remain vulnerable.
  - SMEs account for over two-thirds of total employment; loans to SMEs account for about 19 percent of banks’ total lending in 2022Q1.
  - A sharp deterioration in the financial situation of SMEs could affect the financial sector indirectly.

### External position and reserves
- Current account and REER:
  - Current account balance declined from 4.2 percent of GDP in 2020 to -2,2 percent of GDP in 2021, largely reflecting a sharper decline in tourism receipts and soaring shipping costs amid supply chain disruptions.
  - Resulted in a 7.6 percent REER depreciation in 2021 (relative to the 2020 average).
- Foreign exchange intervention and reserves:
  - FXI was largely two-sided in line with capital flow movements.
  - FX reserves (excluding the net forward position) declined by US$12 billion to US$246 billion at end-2021 (still well-above reserve adequacy metrics).
  - In August 2021, Thailand received 3078.5 million SDR as part of a general SDR allocation; the authorities have not used the SDR allocation.
- External balance assessment (EBA) staff estimates:
  - Cyclically-adjusted current account gap assessed to be around 0.7–2.1 percent of GDP.
  - REER gap assessed to be 1.6-4.8 percent.
- Structural drivers of the savings-investment gap: weak social safety nets, widespread informality resulting in high precautionary savings and subdued investment.

### Outlook and key macro projections
- Growth and inflation projections:
  - 2022 growth projected at 2.8 percent.
  - GDP rebound to 4 percent in 2023 before trending to potential ~3 percent in the medium term.
  - Level of GDP in 2025 projected to be about 11 percent below pre-pandemic expectations.
  - Output gap projected to close only by 2024.
  - Headline inflation expected to average 6.1 percent in 2022 driven by high commodity prices.
  - Headline inflation would average 2.5 percent in 2023 (assuming no further increase in global commodity prices) and converge to 2 percent over the medium term.
  - Current account (CA) balance would narrow to -0 .8 percent of GDP in 2022 and return to a surplus of around 3-  3.5 percent of GDP over the medium term.
- Selected economic indicators (excerpt of projections and historicals):
  - Real GDP growth (y/y percent change): 2018: 4.2; 2019: 2.2; 2020: -6.2; 2021: 1.5; 2022: 2.8; 2023: 4.0; 2024: 3.6; 2025: 3.3; 2026: 3.2; 2027: 3.0.
  - Headline CPI inflation (period average, y/y percent change): 2018: 1.1; 2019: 0.7; 2020: -0.8; 2021: 1.2; 2022: 6.1; 2023: 2.5; 2024: 1.5; 2025: 2.3; 2026: 2.0; 2027: 2.0.
  - Output Gap (in percent of potential output): 2018: 1.1; 2019: 0.2; 2020: -4.2; 2021: -4.1; 2022: -2.6; 2023: -0.8; 2024: 0.0; 2025: 0.5; 2026: 0.5; 2027: 0.0.
  - General government balance (percent of GDP, fiscal year basis): 2018: 0.1; 2019: -0.8; 2020: -4.7; 2021: -7.0; 2022: -5.6; 2023: -3.2; 2024: -3.2; 2025: -3.4; 2026: -3.4; 2027: -3.5.
  - Public sector debt (end of period): 2018: 41.9; 2019: 41.1; 2020: 49.5; 2021: 58.4; 2022: 61.2; 2023: 61.4; 2024: 61.2; 2025: 60.9; 2026: 59.4; 2027: 59.6.
  - Current account balance (Percent of GDP): 2018: 5.6; 2019: 7.0; 2020: 4.2; 2021: -2.2; 2022: -0.8; 2023: 2.2; 2024: 3.7; 2025: 3.3; 2026: 3.4; 2027: 3.3.
  - Gross official reserves (including net forward position, billions of U.S. dollars): 2018: 239.4; 2019: 258.7; 2020: 287.4; 2021: 279.2; 2022–2027: 279.2 (projected).
  - External debt (percent of GDP): 2018: 32.2; 2019: 31.6; 2020: 38.2; 2021: 39.0; 2022: 39.4; 2023: 39.0; 2024: 40.7; 2025: 40.2; 2026: 41.3; 2027: 39.1.

### Risks to the outlook
- Global risks:
  - Resurgent pandemic: new variants and mobility restrictions could weigh on tourism and delay recovery.
  - Further escalation of the war in Ukraine: commodity prices likely to remain elevated, increasing inflationary pressures and depressing goods exports and tourism; broadening of sanctions could intensify financial conditions tightening.
  - Disorderly tightening of global financial conditions: faster AE monetary policy tightening could generate sizable financial spillovers and exchange rate depreciation; limited negative impact on financial stability due to lack of significant balance sheet mismatches in Thailand.
  - Spillovers from a further growth slowdown in China: a 1 percent decline in China’s GDP estimated to lower Thailand’s output by about 0.2 percent.
  - De-globalization: fragmentation in global value chains could adversely affect trade-dependent economy and manufacturing sectors (automotive and electronics).
- Domestic risks:
  - Financial sector stress: elevated private leverage, a prolonged pandemic and AEs’ monetary policy tapering combined with faster-than-envisaged withdrawal of policy support in Thailand could trigger increased insolvencies and derail recovery.
  - Lack of reforms and political fragmentation could amplify scarring, widen income disparities, and pose fiscal and productivity challenges amid a fast-aging population and climate-related natural hazards.

### Authorities’ views and policy stance
- Authorities broadly shared staff’s views on the outlook and risks, but were slightly more optimistic on growth; they highlighted robust private consumption and the gradual rebound of tourism supported by vaccination progress.
- Authorities expressed reservations about the EBA and its ability to precisely capture transitory versus structural pandemic effects; urged caution in presentation and interpretation of EBA results.

### Policy recommendations and discussion
- Near term:
  - Staff recommends a gradual tapering of unprecedented policy support while improving targeting of remaining programs to better support recovery and enhance inclusion.
  - If downside risks materialize, an integrated policy approach with close coordination between monetary and fiscal policies is recommended to address output-inflation tradeoffs.
- Monetary and exchange rate policy:
  - BOT’s data-dependent normalization path is welcome; staff noted an earlier normalization might be warranted given risks of wage and generalized price pressures.
  - BOT should closely monitor inflation and timely initiate a data-dependent adjustment of the policy rate.
  - Complementary and proactive use of macroprudential tools, including a generalized debt-service-to-income (DSTI) ratio, to address financial stability risks from high private leverage.
  - In adverse scenarios, monetary tightening to bring inflation back to target, complemented by discretionary fiscal support using remaining fiscal space followed by gradual consolidation.
  - Exchange rate should continue to act as shock absorber with FXI limited to disorderly market conditions; in severe scenarios a complementary use of FXI along with interest rate hikes may be appropriate.
  - Staff recommends phasing out remaining CFMs on non-resident baht accounts and publication of FXI data (with appropriate lag).
- Financial sector policy:
  - Gradually unwind policy interventions in the banking system while strengthening risk analysis and the bank resolution toolkit.
  - Regulatory relaxation and other policy support measures should be removed once underlying conditions no longer justify them.
  - Continue efforts to strengthen risk analysis and stress-testing of commercial banks, SFIs, and other nonbank institutions.
  - Progress noted on implementing 2019 FSAP recommendations: BOT regulations to bring largest retail deposit-taking SFIs under same supervision standards as commercial banks; progress on bank resolution toolkit and development of a playbook to enhance executability.
  - IMF TA on stress-testing and bank resolution to support ongoing work.

*Source: IMF staff chapter text (Content unit: 1thaea2022001 - 6.      The pandemic has led to highly-differentiated socio-economic outcomes across sectors).*

### 19.      Elevated private debt is a source of financial sector vulnerability and could be a drag on

### 1thaea2022001 - 19.      Elevated private debt is a source of financial sector vulnerability and could be a drag on future growth.

### Financial-sector vulnerabilities and private debt
- Elevated private debt could be a drag on future growth; a further deterioration of private balance sheets from a growth shock or higher borrowing costs could lead to a sharp increase in NPLs.
- Recommended near-term measures:
  - Timely asset quality reviews of loans under relief (LUR) to identify non-viable borrowers, particularly for SFIs given their high exposure to LUR.
  - Acceleration of ongoing efforts to facilitate household debt restructuring.
  - Strengthening the insolvency regime by adding informal and hybrid restructuring options to facilitate orderly exit of nonviable firms and restructuring of private debt.
- Complementary measures to prevent excessive debt accumulation:
  - Lower debt thresholds.
  - Stronger lending standards informed by comprehensive credit information systems and a broad-based DSTI ratio.
  - Removing the relaxation of the LTV ratio by the end-2022, as intended, to help limit leverage.
- Specific vulnerabilities and tools referenced:
  - LUR, SFIs, DSTI, LTV, NPLs.

### Repositioning the financial sector for a sustainable, digital economy
- Medium-term priorities:
  - Develop taxonomy to gear financial flows toward sustainable development.
  - Promote regulatory sandboxes to better oversee new technologies.
  - Continue research on both retail and wholesale CBDCs.
- Regulation and stability guidance:
  - Balance trade-offs between efficiency gains from financial innovation and financial stability.
  - Regulate CBDC and emerging crypto assets in a coordinated and flexible manner to maintain monetary and financial stability.
  - Forthcoming IMF CD will provide advice on CBDC cyber-security.
  - Given Thailand’s exposure to natural disasters, place greater emphasis on measuring and understanding financial sector risks from physical asset losses.

### AML/CFT enhancements
- Progress noted in strengthening the AML/CFT regulatory regime led by the Anti-Money Laundering Office (AMLO) as highlighted in a 2021 APG report (examples: corresponding banking relationships, wire transfers, improving STR reporting requirements).
- Recommended further steps:
  - Enhance transparency and availability of beneficial ownership information of legal entities.
  - Strengthen AML/CFT risk-based supervision, including identification of sources of wealth of politically exposed persons.

### Authorities’ views on macro-financial policies and debt restructuring
- Authorities intend to gradually unwind policy interventions and allow some policy relaxation measures to expire by end-2022 as intended, increasing targeting of policy support.
- Removal of all financial assistance policies will be gradual to avoid derailing recovery.
- Authorities view the Thai banking system as healthy, with sufficient capital to withstand a possible deterioration in loan quality and to support recovery.
- Support continues for long-term debt restructurings to address elevated private debt; BOT is calibrating an appropriate DSTI and has extended DSTI data collection to SFIs and non-banks.
- Forthcoming Beneficial Ownership Information Act will improve transparency of legal persons, trusts, cooperatives, and non-profit organizations and strengthen AML/CFT.

### Fiscal policy: withdrawal of pandemic support and energy subsidies
- Authorities envisage a 1.2 percent of GDP reduction in the fiscal stimulus in FY2022 compared with FY2021, achieved mostly through spending consolidation.
- Energy-related mitigation measures are estimated at about 1.4 percent of GDP; some measures initially approved in March were extended in June until the end of the fiscal year.
- Additional targeted cash transfers to vulnerable groups amount to 0.2 percent of GDP (approved in June).
- Staff assessment: near-term fiscal stance broadly appropriate, but universal energy subsidies (price caps) are particularly costly and regressive and should be gradually phased out as planned.

### Medium-term consolidation, revenue mobilization, and spending priorities
- FY2023 budget aims to steer recovery with higher development spending (21 percent of the budget); overall fiscal stance entails a 3.5 percent of GDP tightening.
- Boosting revenue mobilization is a priority:
  - Thailand’s tax effort is estimated at 46 percent compared with an average middle-income country effort of 64 percent.
  - If Thailand raised tax effort to the average middle-income country, tax revenue could be higher by up to 6 percent of GDP.
  - Recommended measures: frontload tax-base expanding reforms (rationalize exemptions, improve compliance, bring more micro and small enterprises into the tax net); once recovery is entrenched consider increasing the VAT rate (currently at a low 7 percent), reforming the CIT and PIT, and further developing property taxation.
  - These efforts could increase the tax-to-GDP ratio by at least 2.2 percentage points by 2027, compared with 2022.
- Recommended spending reorientation:
  - Scale up public spending on education and training, focusing on STEM and vocational training in partnership with the private sector.
  - Increase public investment in ICT and green resilient infrastructure to leverage digitalization and climate mitigation/adaptation.
  - Expand social protection coverage while ensuring sustainability and better coordination between schemes to avoid duplication.
  - Raise retirement age and/or contribution rates to manage age-related spending pressures.

### Box 1 — Alternative fiscal scenario (staff policy advice)
- Staff advocates a more gradual, growth-friendly medium-term consolidation supported by revenue enhancement and priority spending:
  - Growth-friendly base-broadening revenue enhancement of about 5.8 percent of GDP cumulatively over the medium term (implying a 2.2 percentage points higher revenue-to-GDP ratio in 2027 compared to 2021).
  - Spending recommendations (cumulative over the medium term):
    - New public investments in macro-critical, green and climate-resilient projects: 2.8 percent of GDP.
    - Providing adequately for climate adaptation: 2.1 percent of GDP.
    - Improving vocational training and education: 1 percent of GDP.
    - Expanding targeted transfers and age-related spending: 1.6 percent of GDP.
- Debt dynamics under staff scenario:
  - Debt-to-GDP ratio peaks at 62.5 percent in 2023 before declining to about 59.7 percent of GDP by 2027, keeping well below the government’s debt ceiling of 70 percent of GDP.

### Fiscal governance, transparency, and contingent liabilities
- Recommendations to improve fiscal governance and transparency:
  - Step-up management of subsidies on budget and boost transparency, including publication of audits related to COVID-19 spending and investigations of potential misuse.
  - Limit contingent liabilities from extra-budgetary and quasi-fiscal operations.
  - Develop a comprehensive multi-year pipeline of public investment projects to improve allocation and monitoring of fiscal risks.
  - Adopt more realistic and flexible annual budgets in line with international best practices.
  - Fully implement the 2018 anti-corruption law to bolster governance.

### Structural policies: skills, labor reallocation, and training
- Skill-building essential to meet post-pandemic economy needs and reverse declining productivity growth; long-lasting reallocation of production factors likely as some sectors contract and others (e.g., ICT) expand.
- Policy recommendations:
  - Use active labor market policies (ALMPs) and well-designed education policies to support occupational mobility and reduce skills mismatch.
  - Increase attractiveness of training programs targeted to older people to mitigate job losses among the elderly from automation and digitalization.
  - Strengthen cooperation with the private sector to scale up vocational training and align skills supply with private-sector needs.
  - Streamline administrative requirements for hiring non-resident skilled workers where appropriate.
- Recent initiative: provision of on-the-job training for about 70,000 new graduates and unemployed in the bio-circular and green (BCG) sector.

*Source: IMF staff report (Thailand Article IV staff report chapter excerpts).*

### 29.       Staff recommends leveraging digitalization to boost productivity and economic

### 1thaea2022001 - 29.       Staff recommends leveraging digitalization to boost productivity and economic

### Leveraging digitalization to boost productivity and export sophistication
- Thailand’s manufacturing exports’ competitiveness has declined partly owing to stagnant sophistication content, while tourism has relatively few linkages and diversification prospects compared to other service subsectors (Text Figure 11).
- Thailand can leverage on digitalization to move towards more sophisticated manufacturing and innovative services’ exports. (Selected Issues Paper, Chapter III).
- Policy actions required:
  - Leverage the existing manufacturing base to rise up the value chain through production of more complex products and greater linkages to services.
  - Expand R&D and access to digital technologies to strengthen innovation and increase productivity.
  - Upskill workers to ensure availability of labor in digital and skill-intensive subsectors.
  - Further liberalize the services sector—particularly global innovator services—including by reducing the number of service sectors that require a foreign business license.
  - Ramp up public investment in IT and digital infrastructure, as also envisaged in the Eastern Economic Corridor (EEC) development plan.

### Climate mitigation, adaptation, and macro-fiscal implications
- Thailand’s long-term low greenhouse gas emission development strategy implies achieving carbon neutrality in 2050, and net zero emissions in or before 2065.
- Staff simulations and policy package:
  - A well-designed transition comprising a US$50 carbon price, gradual phasing out of subsidies and use of carbon tax revenues to finance high-impact investments and targeted transfers can boost long-run output by about 2 percentage points compared to the baseline trajectory.
- Climate adaptation priorities:
  - Invest in climate-resilient infrastructure.
  - Address water scarcity and soil degradation.
  - Invest in R&D to unlock opportunities for innovation and new, green, and inclusive growth drivers (Bio-Circular Green Strategy).
- Implementation needs:
  - Strong institutional coordination and a clear implementation framework.
  - Monitoring of progress across government agencies and the private sector.
  - Evaluation of the macro-fiscal implications of both adaptation and mitigation policies.

### Authorities’ views and measures
- Alignment with medium-term structural reform priorities in the 13th National Economic and Social Development Plan (NESD): labor reskilling and upskilling, leveraging digitalization, and promoting green transformation.
- Education, labor market, and immigration measures:
  - Develop E-Workforce Ecosystem platform to integrate workforce and labor market data across agencies; use it to develop tailored lifelong learning and upskilling/reskilling paths and improve job matching.
  - Launch Education to Employment scheme to align vocational education with demand of new growth-driving sectors.
  - Introduce a new long-term residence visa system to attract highly-skilled professionals.
- EEC and manufacturing restructuring:
  - Prioritize research and development and investment in digital infrastructure.
  - Build comprehensive infrastructure (logistics, digital and innovation) to enhance investment in the EEC, complemented with incentives for investment promotion—tax and non-tax (land ownership, foreign entry, and residency)—in knowledge-based and high-technology activities.
  - EEC provides a one-stop service for permits and business licensing and a regulatory sandbox to create optimal rules and regulations.
- Clean energy and carbon policy steps:
  - Incentives to encourage renewable energy investments and implementation of renewable energy projects or pilot programs.
  - Incorporate carbon emission considerations in the automobile tax structure since 2017 and motorcycle excise tax structure since 2019; build on these experiences to shift to broader carbon taxation in the future.
  - Work on climate change legislation to improve carbon footprint reporting and provide a basis for a carbon pricing framework.

### Staff appraisal and near- to medium-term policy recommendations
- Pandemic response and macro buffers:
  - The authorities’ response to the COVID-19 pandemic has been strong and appropriate; ample policy buffers enabled a bold policy response that helped stabilize the economy.
  - The pandemic reemphasized the urgency of decisive and comprehensive reforms to address long-standing structural challenges and seize digital and green transformation opportunities.
- Near-term stance and risks:
  - Recovery is fragile and incomplete; growth prospects hinge on return of foreign tourists and are exposed to soaring energy prices from the prolonged war in Ukraine.
  - Disorderly tightening of global financial conditions and a sharper growth slowdown in China could derail the rebound.
- Monetary and fiscal guidance:
  - The envisaged gradual withdrawal of the pandemic stimulus is broadly appropriate, but policies must remain agile and data-dependent.
  - The BOT should be ready to embark on an earlier, data-dependent normalization path if warranted by inflation dynamics.
  - Financial sector support measures should be gradually tapered, strengthened by risk analysis, household debt restructuring, and bank resolution toolkit improvements.
  - Near-term fiscal consolidation is appropriate; gradual withdrawal of untargeted energy subsidies should be accompanied by targeted support to vulnerable groups.
- Adverse scenario recalibration:
  - If prolonged war in Ukraine and AE monetary policy normalization have larger-than-expected spillovers, monetary policy should tighten to bring inflation under control, while a discretionary increase in government spending should mitigate output impacts.
  - The exchange rate should act as a shock absorber with FXI limited to disorderly market conditions; complementary use of FX sales along with interest rate hikes could lower the output-inflation volatility tradeoff under disorderly depreciation and a spike in risk premiums.
- Medium-term structural agenda:
  - Balance rebuilding buffers with implementing reforms to strengthen resilience and boost productivity.
  - Adopt a more gradual fiscal consolidation underpinned by enhanced revenue mobilization to rebuild policy buffers while supporting structural reforms.
  - Implement a well-coordinated structural reform agenda with clear implementation strategy for upskilling the workforce, scaling up investments in digital and climate-resilient infrastructure, and promoting R&D spending.
  - Carefully assess and monitor macro-fiscal risks associated with green transformation.
  - Reposition Thailand’s financial sector for a sustainable, digital economy while balancing efficiency gains from financial innovation and financial stability.
- Fiscal governance and transparency:
  - Enhance fiscal governance by reducing resort to quasi-fiscal operations and bringing all subsidies on budget to reduce risks from contingent liabilities.
  - Adopt more realistic and flexible budgets including comprehensive investment plans to support medium-term fiscal frameworks aligned with development priorities.
- External position and policy emphasis:
  - Thailand’s external position in 2021 was moderately stronger than warranted by medium-term fundamentals and desirable policies.
  - A more gradual fiscal consolidation focused on enhancing social safety nets, boosting investment in critical physical and IT infrastructure and creating high-productivity jobs will help reduce the persistent saving-investment gap.
- Fund capacity development (CD) support:
  - Ongoing CD on the IPF supports strengthening the monetary policy framework.
  - CD on stress-testing and bank resolution will bolster financial stability.
  - A forthcoming CD on CBDC cyber-security will contribute to positioning the financial sector for a sustainable and digital economy.

*Source: 1thaea2022001 - 29. Staff recommends leveraging digitalization to boost productivity and economic (PDF).*

### 40.      It is recommended that the next Article IV consultation with Thailand takes place on a

### It is recommended that the next Article IV consultation with Thailand takes place on a standard 12-month cycle.

### Fiscal sector developments
- Fiscal deficit widened during 2020-2021 as spending increased while revenues weakened.
- Thailand accumulated significant debt during the pandemic reflecting the strong fiscal response, but public debt remains lower than that of other ASEAN 5 countries.
- Despite sharp debt accumulation, sovereign spreads are one of the lowest among peers and gross financing needs are expected to decline going forward.
- Selected fiscal numbers (Table 1 / Table 3b):
  - General government balance: 0.1; -0.8; -4.7; -7.0; -5.6; -3.2 (2018–2023, percent of GDP).
  - Public sector balance (end of period debt): 41.9; 41.1; 49.5; 58.4; 61.2; 61.4 (2018–2023, percent of GDP).
  - Overall fiscal balance (General Government, FY terms): 10.4; -137.1; -747.7; -1124.2; -947.8; -563.2 (FY2018–FY2023, in billions of baht).
  - Public sector debt (end of period, fiscal scenario Table 3a): 6,781.0; 6,901.8; 7,848.2; 9,337.5; 10,429.0; 10,979.7 (FY2018–FY2023, in billions of baht).

### Real sector and price dynamics
- Thailand’s recovery lagged peers, reflecting continued weaknesses in the tourism sector.
- Domestic demand was the key driver for recovery while external demand was a drag; manufacturing outperformed services.
- Unemployment rate remained elevated amidst increased labor force and stable employment since the pandemic.
- Inflation:
  - Headline CPI (period average): 1.1; 0.7; -0.8; 1.2; 6.1; 2.5 (2018–2023, y/y percent change).
  - Core CPI (period average): 0.7; 0.5; 0.3; 0.2; 2.6; 1.7 (2018–2023, y/y percent change).
- Real GDP growth (y/y percent change): 4.2; 2.2; -6.2; 1.5; 2.8; 4.0 (2018–2023).

### Financial sector developments and soundness
- Credit growth accelerated in 2021 driven by corporate loans; corporate debt increased in 2021 while household debt remained relatively stable after a large increase in 2020.
- Housing loan growth moderated in 2021H2 while housing prices continued to increase.
- Financial soundness (Table 4, most recent 2021 values unless noted):
  - Regulatory capital to risk-weighted assets: 19.7; 19.7; 19.5 (2019–2021 series reported).
  - Nonperforming loans to total gross loans: 3.2; 3.2; 3.3 (2019–2021).
  - Return on assets: 0.8; 0.9; 1.1; 1.0 (2019–2021 quarterly/annual series).
  - Loan-deposit ratio (excludes interbank): 96.9; 96.3; 98.3; 96.3; 96.3; 92.2; 92.8; 93.8 (2016–2021).

### External sector developments
- The current account turned into a deficit in 2021 while reserves decreased.
- Tourist arrivals slowly picking up with relaxation of travel restrictions.
- Goods exports rebounded as external demand recovered; inward direct investment showed strong recovery in 2021.
- Nonresident inflows increased largely via bond flows; real exchange rate depreciated through the year.
- Balance of payments key figures (Table 6 / projections):
  - Current Account Balance (billions of U.S. dollars): 28.4; 38.0; 21.2; -11.0; -4.2; 12.5; 21.9; 21.4; 22.9; 25.4 (2018–2027).
  - Exports, f.o.b. (billions of U.S. dollars): 251.1; 242.7; 227.0; 270.6; 301.7; 312.5; 327.6; 345.8; 362.2; 380.7 (2018–2027).
  - Gross official reserves (including net forward position, billions of U.S. dollars): 239.4; 258.7; 287.4; 279.2; 279.2; 279.2; 279.2; 279.2; 279.2; 279.2 (2018–2027).

### Structural challenges and competitiveness
- Thailand is one of the fastest-aging populations in Asia.
- Relative to peers, room to improve infrastructure and overall global competitiveness.
- Services dominate employment; agriculture lags in productivity.
- Thailand lags competitors in educational attainment; key areas to improve competitiveness include ICT adoption and innovation capacity.

### Key macroeconomic indicators and projections (selected)
- GDP per capita (2021): US$7,232.
- Unemployment rate (2021): 2 percent.
- Poverty headcount ratio at national poverty line (2020A1): 6.8 percent.
- Net FDI (2021): US$-5.65 billion.
- Population (2021): 66.2 million.
- Exchange Rate (2021): 31.98 Baht/USD.
- Real GDP growth projections (2024–2027): 3.6; 3.3; 3.2; 3.0 (2024–2027, y/y percent change, Table 2).
- Headline CPI inflation projections (2024–2027): 1.5; 2.3; 2.0; 2.0 (period average, y/y percent change).

### Risk Assessment Matrix — principal risks and policy responses
- Conjunctural risks (likelihood / impact / suggested policies):
  - Outbreaks of lethal and highly contagious COVID-19 variants — Medium likelihood — Continue targeted support to vulnerable groups and viable firms; frontload and scale up public investments; accelerate structural reforms.
  - Russia’s invasion of Ukraine escalation — High likelihood — Deploy integrated policy approach with close coordination between monetary, macroprudential, fiscal, and structural policies; shield vulnerable groups from high commodity prices.
  - De-anchoring of inflation expectations in the U.S. and/or Advanced European economies — Medium (US)/Low (Euro area) likelihood — Allow exchange rate flexibility; judicious intervention; prudent fiscal policy; strengthen macroprudential framework and cover cooperatives and nonbanks.
  - Abrupt growth slowdown in China — Medium likelihood — Continue targeted support; accelerate structural reform implementation.
  - Rising and volatile food and energy prices — High likelihood — Accommodate first-round cost-push effects given slack; stand ready to address second-round effects that could de-anchor expectations.
  - Widespread social discontent and political instability — High likelihood — Allow automatic stabilizers; provide adequate liquidity to banks; let exchange rate be first defense with FX intervention for disorderly conditions.
  - Disorderly private sector deleveraging — Medium likelihood — Strengthen insolvency regime; strengthen macroprudential toolkit and coverage.
- Structural risks (likelihood / impact / suggested policies):
  - Geopolitical tensions and de-globalization — High likelihood — Implement structural reforms and infrastructure development; allow exchange rate flexibility.
  - Cyberthreats — Medium likelihood — BOT to sustain capacity to deal with cyber-attacks and fintech challenges.
  - Natural disasters related to climate change — Medium likelihood — Improve social safety nets; use carbon pricing; invest in climate-resilient infrastructure; incorporate climate risks in prudential policies.
  - Political uncertainty — Medium likelihood — Deploy integrated policy approach with coordination across policies to mitigate scarring.

### Implementation of Fund recommendations and FSAP follow-up
- Implementation highlights (Table 8 — 2021 Article IV recommendations):
  - Fiscal policy: Government provided an additional 3.4 percent of GDP fiscal stimulus in 2021 financed by additional borrowing of 3 percent of GDP; share of capital spending set to increase by about 5 percentage points in FY2022 vs FY2021.
  - Procurement and transparency: Thai Government Procurement system follows four principles: the value for money, the transparency, the efficiency and effectiveness principle, and accountability; Comptroller-General's Department plans procurement law revisions.
  - Carbon pricing: Authorities preparing legislation to assist in comprehensive carbon footprint reporting for a broad-based carbon pricing regime to achieve 2030 mitigation commitments.
  - Monetary/exchange rate: BOT used bank-based tools to channel excess liquidity to SMEs; FX intervention was largely two-sided; NRQC scheme introduced in early 2021 to relax NRBA constraints and BOT considering further relaxations.
  - Financial policies: BOT supported CPD in issuing more stringent regulations for cooperatives; encouraged long-term debt restructuring; AMLA being amended to expand coverage of reporting entities.
  - Structural policies: “Reskill, Upskill and Newskill Project” launched January 2022 offering 22 non-degree courses in smart farming, smart tourism, and other skills.

- FSAP key recommendation implementations (Table 9 highlights):
  - Regulatory coordination: BOT reviewing alternatives for strengthening cooperation and information sharing among regulators; inviting other regulators to the 3-regulator steering committee.
  - Liquidity and risk monitoring: BOT developed systemic liquidity risk indicators for Thrift and Credit Cooperatives (TCC) and credit unions (CU); developing indicators for non-banks and SFIs; new financial stability dashboard created.
  - Macroprudential policy: Regulated SFIs and NBFIs started submitting DSTI data; BOT calibrating DSTI and extending regulatory scope to hire purchase and leasing companies.
  - Crisis management and resolution: BOT developed a resolution toolkit in 2020, a playbook in 2021, and sample resolution plans; bank-specific resolution planning for D-SIBs ongoing.
  - AML/CFT: Amendments and draft laws in progress including Anti-Money Laundering Act amendments, Counter-Terrorism and Proliferation Act amendments, and a draft Beneficial Ownership Information Act.

*Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.*

### Annex I. Policy Support During the Pandemic

### Annex I. Policy Support During the Pandemic

### Fiscal Support — 2020–21
- The government continued to provide extraordinary support to the economy through 2021.
- After a strong fiscal expansion in 2020, the government provided an additional 2.3 percent of GDP fiscal stimulus in 2021, largely focused on cash handouts to households.
- This increased budget outlays for health and social spending in 2021, while tax revenue declined due to the deferral of income-tax and VAT payment deadlines and new exemptions.
- The overall deficit widened to 7.4 percent of GDP (from -4.8 percent of GDP in 2020).
- Public debt increased to 58.1 percent of GDP (from 41 percent of GDP pre-pandemic).

### Monetary Accommodation
- The Bank of Thailand (BOT) maintained monetary accommodation during 2021 by keeping the policy rate at an all-time low of 0.5 percent.
- The recent rise in inflation pushed real rates even lower.
- The exchange rate depreciation starting from 2021Q1 further loosened broader financial conditions.

### Targeted Support to Financial Institutions and Borrowers
- Authorities continued measures to help financial institutions maintain adequate buffers via:
  - relaxation of regulatory measures;
  - restrictions on dividend payments.
- New liquidity support schemes were launched for SMEs.
- Measures to assist debtors affected by the pandemic included long-term debt restructuring.
- The BOT encouraged banks to consider sustainable recovery plans for borrowers under debt restructuring.

### Financial Sector Support Measures (selected measures and timelines)
- Broad-based and targeted liquidity/loan support for SMEs and affected sectors:
  - BOT soft loan schemes of 500 billion baht for financial institutions to lend to SMEs with interest up to 2 percent per year.
  - GSB soft loan guarantee schemes of 150 billion baht with a maximum of 2 percent interest per year.
  - TCG’s credit guarantee schemes of 150 billion baht (August 2020) and 175 billion baht (October 2021).
  - BOT soft loan plus project additional TCG credit guarantee of 57 billion baht.
  - Cabinet-approved THB 50 billion soft loan program (available until June 30, 2021, through SFIs) to provide low-interest rate loans for up to 3 years to informal workers and SMEs linked to the tourism sector (February 2021).
  - Two post-2020 transformation measures (April 2021): special loan facility with credit guarantee (totaling 250 billion baht) and debt restructuring through asset warehousing (totaling 100 billion baht) with buy-back options.
- Debt relief and borrower assistance measures:
  - Broad-based Debt Payment Holiday Schemes for SME Borrowers (April–October 2020).
  - DR BIZ Project to facilitate multi-creditor debt restructuring (August 2020).
  - Targeted measures enabling freeze of loan classification status and extension of debt payment holidays through end-June 2021 for eligible borrowers (October 2020).
  - Debt Clinic expanded coverage and qualification adjustments (February 2020 onward; NPLs before 1 April 2022 may apply).
  - Debt Exit Fastlane online platform for retail and SME debtors (April 2020), since January 2022 linked to Multi-creditor Facility for SMEs and Debt Doctor facility.
  - Debt Consolidation Schemes (August 2020); refining and expansion across different financial institutions (November 2021).
  - Additional household support measures (September 2021) including reduction of minimum monthly repayment for credit card, increasing the credit limit on credit card and personal loans, extension of credit limit and repayment period of digital personal loans, and assisting debtors through long-term debt restructuring.
  - Online Debt Mediation Events (2021) to assist borrowers via BOT-participating lenders.
- Measures to sustain capital positions and regulatory relief for financial institutions:
  - BOT reduced the rate of contribution from financial institutions to the FIDF to 0.23 percent of deposit base per annum from 0.46 percent until December 2022 (May 2020).
  - Commercial banks asked to prepare capital management plans and assess positions under stress scenarios during 2020-22.
  - Financial institutions prohibited to pay dividend more than the dividend payout amount of year 2019 or 50 percent of year 2020 net profit; premature repurchase of stocks and debentures countable as tier 1 or 2 regulatory capital also forbidden.
  - BOT eased eligibility criteria for banks’ additional tier 1 and tier 2 regulatory capital to be on par with international standards.
  - BOT provided guideline for 2020 dividend payment allowing financial institutions to pay dividends for year 2020 performance not exceeding previous year payout ratio and 50 percent of net profit of 2020 (November 2020).
  - Temporarily Easing of Loan-to-Value (LTV) Regulations (October 2021).
  - BOT relaxed the dividend payment policy for 2021 by unwinding the dividend payout limit; financial institutions allowed to pay dividends for 2021 performance not exceeding 50 of the net profit of 2021 (November 2021).

### Observations on Financial Conditions and External Notes
- Exchange rate depreciation can affect overall financial conditions through trade and financial channels; given low balance sheet mismatches in Thailand, the impact via the financial channel is small. Hence, depreciation loosens financial conditions via the trade channel.
- The tables and figures referenced (Annex I. Figure 1; Annex I. Table 1; Annex I. Table 2) summarize pandemic expenditures, COVID-19 fiscal measures FY2020-22 (in percent of GDP), and detailed financial sector support measures in 2020–21.

*Source: IMF staff summary from Annex I. Policy Support During the Pandemic.*

### 3.4 percent of GDP. Net portfolio investment

### 1thaea2022001 - 3.4 percent of GDP. Net portfolio investment

### Capital and Financial Accounts: Flows and Policy Measures
- 2021 capital and financial account balance strengthened to -0.4 percent of GDP from -2.4 percent in 2020, driven by recovery in inward direct investment (from -1 percent in 2020 to 2.2 percent of GDP in 2021).
- Net portfolio investment remained broadly stable with outflows of about 2.2 percent of GDP.
- Other net investments declined from 4.9 to 3.2 percent of GDP.
- Since 2013, Thailand has experienced episodes of volatility reflecting external financial conditions, political uncertainty, and the COVID-19 shock, but has weathered episodes well given strong external buffers and fundamentals, including the lack of balance sheet mismatches.

Policy recommendations and measures welcomed by staff:
- Staff welcomes implementation of measures such as relaxing the annual limit on foreign securities investments abroad by Thai retail investors who do not go through local intermediaries, and abolishing such limit for institutional investors and for retail investors invested through local intermediaries.
- Staff welcomes the Bank of Thailand’s removal in 2021 of limits on NRBA for qualifying non-resident firms to facilitate baht liquidity management.
- Staff recommends additional phasing out of the remaining capital flow management measures on non-resident baht accounts (NRBA and NRBS), noting that volatile capital flows are better addressed through a package of macroeconomic and financial policies.
- Complementary measures advised:
  - Use structural policies to limit distortions related to the large savings investment gap in the medium-to -long term—by reducing precautionary savings, enhancing social safety nets, and boosting investment.
  - Promote an FX ecosystem that is more resilient to volatile capital flows (for example, by availability of hedging instruments, etc.).
  - Pursue a comprehensive package of macroeconomic, financial, and structural policies to address volatile capital flows, complemented with gradual and prudent financial account liberalization.

### FX Intervention and Reserves
Background:
- Gross reserves (including net forward positions) were US$279.2 billion at end-2021 (55.2 percent of GDP), decreasing slightly from US$286.5 billion (57.3 percent of GDP).
- Reserves remain well above reserve adequacy metrics (over 200 percent of the IMF’s Reserve Adequacy Metric for EMs and 12 months of imports).
- Although data on FX intervention is not available, staff estimates suggest FX intervention has been largely two-sided in 2021.
- The exchange rate regime is freely floating / classified as (de jure and de facto) floating.

Assessment:
- Given that FX reserves exceed all adequacy metrics, there is no need to build up reserves for precautionary purposes.
- The exchange rate should move flexibly as the key shock absorber.
- FX intervention should be limited to avoiding DMC / tackling disorderly market conditions.
- Estimates suggest two-sided intervention for the year; reserves are higher than the range of IMF’s reserve adequacy metrics and there continues to be no need to build up reserves for precautionary purposes.

Key reserve-level statistics:
- International reserves (including net forward position) declined from 57.3 percent of GDP in 2020 to 55.2 percent of GDP in 2021.
- Reserves are over three times short-term debt and 12 months of imports, and over 200 percent of the IMF’s standard reserve adequacy metric.

### External Position and Current Account
Overall assessment:
- The external position in 2021 was moderately stronger than the level implied by medium-term fundamentals and desirable policies.
- The current account (CA) balance declined from 4.2 in 2020 to -2.2 percent of GDP in 2021, reflecting the pandemic impact.
- The CA balance is expected to narrow to -0.8 percent of GDP in 2022 as tourism receipts recover and return to a surplus of around 3 percent of GDP in the medium term.

Current account background details:
- Services account collapsed as international tourist arrivals fell to around 1 percent of their pre-pandemic level.
- Shipping costs surged due to supply chain disruptions.
- Goods exports bounced back with recovery in global demand; goods imports (particularly raw material and intermediate goods) increased as demand for intermediate inputs increased with rising exports.
- Fuel imports increased markedly with the rapid rise in oil prices.
- Overall, the trade balance weakened by 0.3 percent of GDP.

EBA and staff estimates for 2021:
- CA: -2.2 percent of GDP
- Cycl. Adj. CA: -2.8 percent of GDP
- EBA Norm: 1.4 percent of GDP
- EBA Gap: -4.2 percent of GDP
- COVID-19 Adj.: 5.6 percent of GDP
- Other Adj.: 0.0 percent of GDP
- Staff Gap: 1.4 percent of GDP

Assessment of CA gap:
- The CA gap of -4.2 percent of GDP consists of an identified policy gap of -1.2 percent of GDP and an unexplained residual of -3 percent of GDP, partly reflecting the unique nature of the COVID-19 shock and structural factors not captured by the EBA model.
- Adjustors applied: large shocks to travel and transport sectors of 4.4 and 1.9 percent of GDP respectively; staff proposes a transportation adjustor of 1.93 percent of GDP.
- Further adjustments: reflect global shift in private spending composition from services towards consumer goods and related increase in consumer goods exports from Thailand (-0.9 percent of GDP) and net exports of medical supplies triggered by the pandemic (0.1 percent of GDP).
- Overall staff assesses the CA gap to be in the 0.7-2.1 percent of GDP range with a midpoint of 1.4 percent of GDP.
- The CA gap is expected to narrow over the medium term as domestic demand recovers and steps are taken to reform the social protection system.

### Foreign Asset and Liability Position (NIIP) and External Debt
Background and 2021 levels (% of GDP):
- NIIP weakened in 2021 to 9.5 percent of GDP (from 11.5 percent in 2020).
- Gross assets declined from 122 to 120 percent of GDP (49 percent of GDP being reserve assets).
- Gross liabilities remained stable at 110 percent of GDP (dominated by direct (about half) and portfolio (a quarter) investment).
- Net direct investment assets increased by 3 percentage points of GDP.
- Portfolio and net other investment assets declined by 1 and 2 percentage points of GDP, respectively.
- 2021 (% GDP) summary: NIIP: 9.5; Gross Assets: 120.1; Debt Assets: 23.3; Gross Liab.: 110.6; Debt Liab.: 39.0.

Assessment:
- NIIP is projected to remain in a small creditor position over the medium term given projected current account surpluses.
- External debt remained stable at 39 percent of GDP, of which short-term debt (on a remaining maturity basis) amounts to 14 percent of GDP; external debt stability and liquidity risks are limited.

### Annex III — Potential Output and Output Gap: Key Findings and Pandemic Effects
Main findings:
- Potential output growth has been decreasing since the 1990s.
- The decrease in potential output growth has been mostly driven by a slowdown in total factor productivity (TFP) growth and weak investment—both public and private.
- The manufacturing sector has been particularly affected by the slowdown in TFP and investment.
- The pandemic induced a large negative output gap which is expected to close in 2024.
- Under a business as usual scenario, Thailand will not reach high income level status by 2037—the objective of the authorities.
- The annex proposes key reforms that could help Thailand boost its potential output.

Pre-pandemic potential output developments:
- Prior to the Asian financial crisis (AFC), potential output growth averaged about 5 percent.
- This declined to about 4 percent after the AFC until the global financial crisis (GFC) in 2008, and to 3 percent from the GFC until 2019.
- Declining TFP growth combined with weak investment (both public and private) have been the major drivers of declining potential output growth in Thailand.
- Total investment decreased from about 47 percent of GDP in 1990 to about 24 percent of GDP in 2019.
- Prior to the pandemic (2015-19), total investment averaged about 28 percent of GDP in other ASEAN countries (Indonesia, Malaysia, and Philippines) compared to 23 percent of GDP in Thailand.

Sectoral observations:
- All sectors experienced a decline in capital accumulation; slowdown in productivity most pronounced in agriculture and manufacturing.
- Agricultural sector employs about 30 percent of the working force but accounts for only 6½ of GDP.

Pandemic channels and effects on potential output:
- Labor market channels: lower participation rates, higher unemployment, hysteresis/scarring, reduced migration; policy support included a fiscal support package amounting to about 6 percent of GDP in 2020-21, subsidized employment (3,000 baht per worker and up to 200 employees per firm), and increased insured persons in social security. Unemployment rate among insured persons in the private sector peaked at 4.4 percent in 2020Q3 and shrank to 2.5 percent in 2021Q3. The social assistance package is estimated to have reached 81.5 percent of households including informal workers and farmers.
- Investment channels: investment contracted by 4.8 percent in 2020 driven by contraction of private investment (8.2 percent) owing to drop in investment in equipment. Private investment grew about 3 percent in 2021. Public investment remained strong in 2020 and 2021. Total investment grew at about 3.4 percent in 2021, slightly above pre-pandemic trends.
- Total factor productivity channels: pandemic could reduce TFP via supply chain disruptions, financial distress, sectoral reallocation, reduction in R&D; could increase TFP via cleansing of "zombie firms" and acceleration of digitalization. In Thailand, the impact of the pandemic on potential output is mostly through TFP given strong policy support cushioned labor market and capital accumulation effects.

Output gap estimates and trajectory:
- Median estimate of the output gap is about -4 percent of potential output in 2021 and -2.5 percent of potential output in 2022.
- Various estimates suggest the output gap is expected to close in 2024; some estimates suggest closure in 2023 but the median points to 2024.
- Thailand’s recovery appears slower compared to peers, likely related to overreliance on tourism; other ASEAN countries expected to recover pre-pandemic real GDP level in 2022 while Thailand will barely do so by 2023.

*Italic: Source — Excerpts from IMF staff report content in 1thaea2022001 - 3.4 percent of GDP. Net portfolio investment*

### 6.      The effect of the pandemic on potential output in Thailand has been large.  We run a

### 6.      The effect of the pandemic on potential output in Thailand has been large.

### Impact on potential output and drivers
- Potential output growth has decreased about 1 percentage point and 0.8 percentage points in 2020 and 2021, respectively.
- The drop in TFP is the main driver of lower potential output growth in 2020 and 2021.
- Investment did not contract much during the crisis, which could explain why capital accumulation effects were limited; nevertheless, a large output gap suggests the pandemic affected aggregate demand more than potential output.
- The level of potential output in 2025 will remain below its pre-pandemic trend, indicating the pandemic is inducing long-term scarring.

### Medium-term outlook and thresholds for high-income status
- Post-pandemic, under unchanged policies, potential output growth is estimated to converge toward its long-term value of about 3 percent.
- This potential output growth is too low for Thailand to reach high-income status by 2037 (authorities' objective).
- To reach high-income status by 2037, a comprehensive package of fiscal and structural reforms is needed to increase potential output growth back to 5 percent.
- The high income threshold cited: $12,695 as of July 2021 by the World Bank.
- Baseline assumptions noted:
  - Baseline assumes an increase in potential growth of 3 percent (average 2009-19).
  - Reform scenario assumes an increase of potential growth of 5 percent (average 1990-98).
  - The high income threshold assumes an increase of 1.3 percent per year (the growth rate from 2020 to 2021).

### Policies to increase potential output post-pandemic — key reform areas
- Physical capital
  - Public and private investments have been stagnant since the late 1990s, resulting in an almost-flat capital stock accumulation; new investments are barely offsetting depreciation.
  - Policy recommendations:
    - Higher public investment.
    - Create the right incentives and favorable economic environment to boost private investment, including FDI, which is very low.
    - Gradually lift legal barriers for domestic and foreign companies to access infrastructure markets to boost public investment efficiency (IMF, 2016a).
    - Important investments in ICT and digital infrastructure to leverage digitalization, increase participation in global value chains and create better jobs.
  - Note: Thai authorities are investing in key infrastructure projects such as rail system, intercity motorway and utilizing the special economic area particularly the Eastern Economic Corridor.
  - Other measures to improve public investment efficiency include:
    - Developing and presenting in the budget documents a comprehensive multi-year pipeline of public investment projects;
    - Developing guideline on capacity in project appraisal by line ministries;
    - Centralize and coordinate the monitoring of investment projects across agencies including physical verification.
- Human capital
  - Contribution of human capital to potential output has been modest.
  - Policy recommendations:
    - Greater focus on Science, Technology, Engineering, and Math subjects (IMF, 2016b) while upgrading skills.
    - Strengthen oversight of the Technical and Vocational Education and Training (TVET) system institutions and reduce challenges for private sector participation in TVET (World Bank, 2022).
- Structural transformation under population aging
  - Thailand’s population is aging rapidly and the labor force is shrinking.
  - Ratio of employment to working age population: peaked at about 71½ percent in 2009; reached 66 percent in 2020; projected to decline to 63 percent by 2027.
  - Policies to mitigate aging impact:
    - Increase the retirement age (currently statutorily set at age 60).
    - Reduce the gap between female and male labor force participation rates.
    - Deploy an effective immigration policy to boost the size of the workforce.
    - Improve labor productivity through higher quality of education and skill upgrading.
  - Additional notes:
    - Low productivity in the agricultural sector implies large aggregate productivity gains possible via agro-processing and labor reallocation from agriculture to more modern sectors.
    - Better training, appropriate education, enhanced social protection and moving up into value chains could facilitate labor reallocation.
  - The government recently introduced a Long-term Resident Visa to attract potential foreigners to move to Thailand particularly high skill workers.
- Enhanced competition and openness at the firm level
  - Slowdown of productivity in manufacturing sector is particularly worrying; manufacturing productivity affects the entire economy through externalities.
  - Key policies to boost manufacturing productivity:
    - Enhance competition in the domestic economy by implementing the new Competition Act.
    - Increase openness to FDI by reducing FDI restrictions in non-strategic industries.
    - Boost skilled labor and reduce skills mismatch to promote an ecosystem for firm innovation.

### Box 1 — Measuring potential output and the output gap (methodologies)
- Production function approach
  - Focuses on supply side; allows decomposition of potential output growth (e.g., Cobb-Douglas).
  - Requires calibration of many parameters (e.g., rate of depreciation, contributions of inputs) that are difficult to estimate with standard national accounts data.
  - Specification follows World Bank (2020).
- Multivariate approach (Blagrave et al. (2015))
  - Based on economic concepts (e.g., Phillips curve), consistent with Okun concept of potential output, not data-hungry, allows incorporation of shocks (supply and demand).
  - Main variables: GDP growth, inflation, unemployment.
- Structural vector autoregression (Blanchard and Quah (1989))
  - Distinguishes permanent and transitory components; assumes demand shocks temporary, supply shocks permanent.
  - Combines statistical approach with economic constraints; uses variables such as credit growth and inflation.
- Other statistical approaches
  - Baxter-King and Christiano-Fitzgerald filters used.
  - Pros: simple, transparent, require few data.
  - Cons: do not incorporate economic structure and suffer from the ‘end-sample problem’ (end-period estimations subject to large revisions).
- Note: Estimating potential output is particularly daunting during times of increased uncertainty such as the pandemic; combining methodologies helps minimize over-reliance on any single technique.

### Annex IV — Integrated policy approach to adverse scenarios (summary)
- Context and recent performance
  - After contracting by 6.2 percent in 2020, the economy grew by 1.5 percent in 2021.
  - Headline inflation at 7.1 percent y/y in May 2022, breaching the Bank of Thailand’s upper target band of 3 percent.
  - Core inflation increased to 2.3 percent.
  - Negative output gap remains large and projected to close only by 2024.
- Baseline staff projections (2022-23)
  - Assumes conflict remains confined to Ukraine, further sanctions on Russia exempt energy sector, and pandemic impacts abate over 2022.
  - Growth in 2022 projected at 2.8 percent as relaxation of travel restrictions leads to gradual recovery in tourism.
  - Anticipated turnaround in advanced economies’ monetary policy stance in 2022 expected to lead to a gradual and orderly rise in global long-term rates and depreciation of EM currencies, including the Thai baht.
- Two illustrative adverse scenarios analyzed
  - Scenario 1: Prolonged war in Ukraine, broad-based risk-off shock, elevated commodity prices, tightening global financial conditions, large increase in global risk aversion, asset market sell-offs, spike in risk premia, exchange rate depreciation, potentially demand compression in Thailand; lack of significant balance sheet mismatches should limit negative financial stability impact.
  - Scenario 2: Disorderly tightening of global financial conditions following rapid U.S. monetary policy tapering; leads to higher borrowing costs, weighs on fragile recovery, could generate financial spillovers; some offset via improved trade balance from exchange rate depreciation and external demand.
- Initial conditions and frictions affecting policy choices
  - Initial conditions: large negative output gap, built-up inflationary pressures driven by energy prices, exchange rate assessed weaker than fundamentals, large reserve buffers.
  - Frictions: benefits of exchange rate flexibility depend on presence of financial and real frictions; some support for FX interventions (FXI) given possible frictions.
  - FX and invoicing specifics:
    - FX liabilities comprised only 5.4 percent of total banking system liabilities as of 2020Q4.
    - Around 75 percent of Thailand’s trade (both exports and imports) is invoiced in U.S. dollars (dominant currency invoicing).
  - Thailand has a relatively mature inflation targeting framework with relatively low exchange rate passthrough and well-anchored inflation expectations; however, passthrough is asymmetric and stronger for depreciation versus appreciation.
- Policy trade-offs under the first shock scenario
  - External shock further widens the already large output gap (by over 2 percent), largely driven by a collapse in domestic demand.
  - Increase in commodity prices and spike in risk premiums would cause sharp exchange rate depreciation, lead to DMC and further push inflation up.
  - Interest rate hikes would bring inflation closer to target but would worsen the large output gap and increase interest rate exposure of vulnerable borrowers.

*Source: IMF staff analysis in 1thaea2022001.*

### 6.      An integrated use of available policy instruments would yield better outcomes given the

### 6.      An integrated use of available policy instruments would yield better outcomes given the

### Integrated monetary and FX policy: main findings and comparative scenarios
- Counterfactual scenario analysis compares:
  - (i) interest rate hike and endogenous FX intervention (FXI) based on estimated reaction functions in the model;
  - (ii) no FXI;
  - (iii) no FXI but more aggressive interest hikes; and
  - (iv) policy scenario (i) along with fiscal support.
- Monetary policy (interest rate hikes) should be the first line of defense.
- Under a scenario of sharp exchange rate depreciation and a spike in risk premiums threatening to de-anchor inflation expectations and cause DMC:
  - Complementary use of FXI is effective in helping moderate inflationary pressures and alleviating risks of de-anchoring of inflation expectations.
  - By relieving some pressure from monetary policy, FXI results in a lower output cost.
  - The increase in risk premia (and hence long-term yields) is lower (almost by half) when FXI is used along with interest rate hikes, limiting impact on funding costs.

### Role of fiscal support in a comprehensive package
- A comprehensive package including a fiscal stimulus can further limit the deterioration in the output gap in response to the shock.
- The shock to growth and associated revenue losses would increase the debt-to -GDP ratio by about 2 percent of GDP compared with the baseline.
- To cushion the impact, the government could increase discretionary spending by 2   percent of GDP compared with the baseline followed by only a gradual consolidation.
- Projected public debt dynamics with such fiscal support:
  - Total public debt would peak at almost 67 percent of GDP in 2024-25 but would stabilize at about 65   percent of GDP thereafter.
  - This additional intervention would leave very little room for maneuver and would need to be carefully calibrated as debt dynamics deteriorate as the debt-to -GDP ratio approaches 70 percent of GDP (Annex V).

### Scenario 2: trade-offs and when FX intervention may be less justified
- In the second scenario (Figure 2), tightening global financial conditions also cause exchange rate depreciation and upward pressure on inflation, but effects are smaller because external demand is strong.
- Depreciation results in an improvement in the trade balance supported by higher external demand due to faster U.S. recovery.
- Domestic demand falls in response to interest rate hikes, but the overall effect on the output gap is positive (i.e., narrowing the negative output gap).
- In this scenario, additional benefits of FX intervention may not justify the costs not captured by the model (for example, creating a perception of a managed exchange rate regime that can lower monetary policy credibility).

### Policy guidance and conditionality
- Appropriate use of policies depends on the nature of shocks and countries’ initial conditions.
- Current backdrop includes:
  - A still-large output gap,
  - Mostly supply-side driven inflationary pressures, and
  - An exchange rate assessed to be weaker than implied by fundamentals.
- Policy principles:
  - Exchange rate flexibility should be the first line of defense in response to external shocks.
  - Sharp exchange rate movements and DMC that might threaten de-anchoring of inflation expectations may motivate the use of FX intervention.
  - Fiscal policy should provide support to the economy and limit the contractionary effect of monetary tightening on vulnerable agents without contributing to further inflationary pressures.

### Annex V — Debt Sustainability Analysis (key figures and projections)
- Exceptional fiscal response to the pandemic pushed total public sector debt to 58.38 percent of GDP in 2021 (from 41 percent of GDP in 2019).
- Debt is expected to increase to about 61.2 percent of GDP in 2022 and decline moderately over the medium term under baseline.
- Macroeconomic baseline assumptions:
  - Real GDP growth in 2021: 1.6 percent.
  - Real growth projected for 2022: 2.8 percent of GDP.
  - Medium term (2023-27) average growth: 3.3 percent of GDP.
- Fiscal balances and deficits:
  - Fiscal deficit widened to 4.8 percent of GDP in 2020 and to 7.4 percent of GDP in 2021.
  - Headline overall deficit expected to moderate to 6.2 percent of GDP in 2022.
  - Under current policies, deficit projected to gradually moderate to about 3 percent of GDP over the medium term.
- Debt composition and financing:
  - About 94.16 percent of the debt is in medium and long-term instruments.
  - 98 percent of the debt is denominated in local currency.
  - Gross financing needs increased to 15 percent of GDP in 2021; projected to decline to 9.0 percent of GDP in 2022 and to an average of 5.3 percent of GDP in 2023–27.
- Baseline public debt path:
  - Public debt rose to 58.38 percent of GDP in FY2021.
  - As of February 2022, public debt had reached 60.2 percent of GDP and is expected to increase to 62 percent of GDP by the end of the fiscal year.
  - Under the baseline, public debt to GDP ratio is expected to peak at 61.4 percent in 2023 and gradually decline to 59.6 percent in 2027.
  - Baseline assumes use of the balance of the THB 1.5 trillion loan to support recovery and gradual return of revenue-to-GDP ratio to about 16 percent of GDP.
- Stress and shock scenarios:
  - Under a real GDP shock (standard deviation of growth for past decade), debt rises to about 68.6 percent of GDP in 2024; remains above 65 percent of GDP throughout medium term.
  - Under a combined macro-fiscal shock (real growth declines and interest rates increase), public debt reaches 69.5 percent of GDP in 2024, almost breaching the 70 percent threshold, and remains above 65 percent of GDP throughout the projection period.
  - Gross financing needs remain below the DSA’s 15 percent benchmark under all shock scenarios.
- Risks and policy implications:
  - Debt dynamics deteriorate significantly more under stress scenarios than in the 2021 DSA, reflecting rapid pandemic-era debt increases and reduced fiscal space.
  - Maintaining high debt increases vulnerability to interest rate increases, raises debt rollover risks, and limits government capacity to respond to future shocks and scale up priority spending.
  - Restoring public finances through a mix of tax and spending policies is a priority to rebuild fiscal space once the recovery takes hold.

*Source: IMF staff report excerpts (Thailand Staff Report for the 2022 Article IV Consultation — informational annex).*

### 2014. The NESDC introduced new quarterly GDP current price and chain-linked volume estimates in May 2015.

### 1thaea2022001 - 2014. The NESDC introduced new quarterly GDP current price and chain-linked volume estimates in May 2015.

### Data sources, compilation, and standards
- NESDC introduced new quarterly GDP current price and chain-linked volume estimates in May 2015.
- Price statistics:
  - The Bureau of Trade and Economic Indexes (BTEI) compiles and disseminates a monthly consumer price index with weights based on expenditure data collected from households during the 2015 Socio-Economic Survey since January 2017.
  - Index coverage is restricted to middle-income urban households.
  - BTEI publishes aggregate indexes for the low-income and rural populations.
  - BTEI publishes a monthly producer price index with base year 2010.
  - The Bank of Thailand (BOT) disseminates a RPPI covering metropolitan Bangkok; STA has provided technical assistance towards broadening coverage to include other regions.
- Government finance statistics:
  - Authorities provide data consistent with the Government Finance Statistics Manual, 2014 (GFSM 2014) for publication in the Government Finance Statistics Yearbook and the International Finance Statistics, and for surveillance.
  - General government fiscal data are reported to the Fund annually; monthly and quarterly data for key general government GFS-based numbers are published on the authorities’ website.
  - Aggregated GFSM 2014-based data for selected nonfinancial state-owned enterprises (SOEs) are compiled and published, but with substantial delays.
  - Public sector debt data published on the authorities’ website include debt of nonfinancial SOEs and Specialized Financial Institutions.
- Monetary statistics:
  - Authorities submit Standardized Reporting Forms (SRFs) for monetary statistics on a timely basis for publication in IFS.
  - Reported SRFs include the central bank, other depository corporations, and other financial corporations (OFCs).
- Financial soundness indicators (FSIs):
  - Authorities report 11 of the 12 core FSIs and 7 of the 13 encouraged FSIs for deposit takers, one FSI for OFCs, one for households, and 3 FSIs for real estate markets—on a quarterly basis—with about one quarter lag.
- Financial Access Survey (FAS):
  - Authorities report several series and indicators to the FAS, including mobile money and the two indicators adopted by the UN to monitor Target 8.10 of the SDGs: commercial bank branches per 100,000 adults and ATMs per 100,000 adults.
- External sector statistics:
  - BOT compiles and disseminates balance of payments (BOP) and international investment position (IIP) statistics quarterly following BPM6.
  - Quarterly BOP and IIP available for 2022Q1 (at the time of assessment); historical BPM6-based BOP and IIP go back to 2005.
  - Methodology remains adequate; further improvements expected to enhance coverage and accuracy, particularly for concepts such as digital trade.
  - Data on external debt and debt service improved since introduction of a quarterly survey of private nonbank external debt.
  - BOT participates in STA coordinated direct and portfolio investment surveys and regularly reports International Reserves and Foreign Currency Liquidity Data Template.
  - Need to corroborate methodology and data with the Ministry of Tourism and Sports (tourism), improve collaboration with NESDC (integrated business register), and liaise with Customs Department for free zone and ecommerce activities.
- Data standards and quality:
  - Subscriber to the Special Data Dissemination Standard (SDDS) since August 9, 1996.
  - Data ROSC published in April 2006.

### Table of Common Indicators (as of June 27, 2022) — reporting frequencies and latest observations
- Exchange Rates: Date of Latest Observation 6/27/2022; Date Received 6/27/2022; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 6/22/2022; Date Received 6/22/2022; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W.
- Reserve/Base Money: Date of Latest Observation 5/2022; Date Received 6/14/2022; Frequency M M M.
- Broad Money: Date of Latest Observation 4/2022; Date Received 6/3/2022; Frequency M M M.
- Central Bank Balance Sheet: Date of Latest Observation 5/2022; Date Received 6/14/2022; Frequency M M M.
- Other Depository Corporations Sectoral Balance Sheet: Date of Latest Observation 4/2022; Date Received 6/3/2022; Frequency M M M.
- Interest Rates: Date of Latest Observation 6/27/2022; Date Received 6/27/2022; Frequency D D D.
- Consumer Price Index: Date of Latest Observation 5/2022; Date Received 6/10/2022; Frequency M M M.
- Revenue, Expenditure, Balance and Composition of Financing — General Government: Date of Latest Observation 2021; Date Received 2/2022; Frequency A A A.
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of Latest Observation 4/2022; Date Received 6/2022; Frequency M M M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation 4/2022; Date Received 6/2022; Frequency M M M.
- External Current Account Balance: Date of Latest Observation 4/2022; Date Received 5/2022; Frequency M M M.
- Exports and Imports of Goods and Services: Date of Latest Observation 4/2022; Date Received 5/2022; Frequency M M M.
- GDP/GNP: Date of Latest Observation 2022: Q1; Date Received 5/2022; Frequency Q Q Q.
- Gross External Debt: Date of Latest Observation 2022: Q1; Date Received 5/2022; Frequency Q Q Q.
- International Investment Position: Date of Latest Observation 2022: Q1; Date Received 6/2022; Frequency Q Q Q.
- Note on frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

### Recent macroeconomic developments and outlook (update to July/August 2022)
- Real GDP:
  - Real GDP expanded by 2.5 percent (y/y) in 2022Q2 from 2.3 percent in 2022Q1.
  - Expenditure drivers: private consumption and export of services.
  - Production drivers: accommodation and food services (driven by increased international tourist arrivals), wholesale and retail trade, and transportation.
  - Tourist arrivals exceeded 1 million in July (2.1 million in January-June).
  - Annual GDP growth projected at 2.8 percent by staff amid a highly uncertain global outlook and predominantly downside risks; faster-than-envisaged tourism recovery could strengthen growth.
- Authorities’ outlook:
  - Authorities’ GDP growth projections: 3.0 – 3.5 percent for 2022 and 3.5 – 4.5 percent for 2023.
  - Staff projections: 2.8 percent for 2022 and 4.0 percent for 2023.
- Inflation:
  - Inflation moderated slightly to 7.6 percent in July 2022 from 7.7 percent in June (y/y).
  - Transportation and communication prices decreased from 14.8 percent in June to 10.2 percent in July.
  - Energy prices remained elevated; most price caps on fuel products were extended through end-September.
  - Electricity prices set to be raised by 18 percent for the September-December 2022 period.
  - Core inflation accelerated to about 3 percent in July 2022 from 2.5 percent in June.
  - Average annual inflation projected at 6.1 percent by staff.
  - Authorities’ headline inflation projections: 6.2 percent for 2022 and 2.5 percent for 2023.
  - Authorities expect inflation to peak in 2022Q3 and fall into target range in 2023 as supply-side pressures subside.
- Financial conditions and capital flows:
  - Thai baht depreciated by around 9 percent in the first seven months of 2022; then appreciated by 3.8 percent against the U.S. dollar in August (as of August 16).
  - NEER appreciated by 1.9 percent over the same August period.
  - Net portfolio inflows (bonds and equities) declined from around US$6 bn in 2022Q1 to US$0.7 bn in 2022Q2.
  - Net portfolio inflows into equities rebounded in August supported by ongoing recovery.
  - Medium-term government bond yields continued to decline.
- Monetary policy:
  - BOT raised policy rate by 25 basis points from 0.5 to 0.75 percent at its August 10 Monetary Policy Committee meeting.
  - BOT pursuing gradual normalization of monetary policy, monitoring inflation dynamics, cost pass-through and inflation expectations.
  - MPC emphasized data-dependent and gradual normalization strategy; first consideration to prevent high inflation from becoming entrenched.

### Financial sector performance, relief measures, and restructuring efforts
- Banking sector indicators (2022Q2):
  - NPL coverage ratio: 166.6 percent.
  - Liquidity coverage ratio: 185.5 percent.
  - BIS ratio: 19.6 percent.
- Stress tests indicate commercial banks have sufficient liquidity and strong positions under stress scenarios.
- Financial relief and credit assistance:
  - Soft loan program and special loan facility for SMEs supported SME loan expansion at 0.9 percent in 2022Q2.
  - Debt restructuring via asset warehousing program: total of 50 billion baht loan under the scheme as of July 2022.
  - Loans under credit assistance decreased to 2.9 trillion baht in May 2022 from 3.5 trillion baht at end-2021 and down from peak of 7.2 trillion baht in July 2020.
- Out-of-court debt resolution schemes and results:
  - Debt Consolidation scheme: consolidates multiple debts across financial institutions to lower interest rates by sharing collateral.
  - Debt Clinic: helped resolve debt issues for around 87,000 accounts with success rate of 88 percent.
  - Debt Mediation Fair: processed more than 231,000 accounts with a 75 percent success rate.
- Policy stance:
  - Authorities seeking to normalize policy by gradually unwinding broad-based support while maintaining targeted measures for vulnerable groups.
  - Financial assistance measures being phased out for debtors; covid-related restrictions on creditors (e.g., cap on dividend payout) have been lifted.
  - Debtors in need can still access special loan facility and asset warehousing program which will continue until April 2023.
  - BOT temporarily eased some bank regulations to accelerate long-term debt restructuring.
  - Authorities emphasize a holistic debt life-cycle approach: responsible lending, borrower financial literacy, debt mediation and bankruptcy processes, macroprudential measures, and comprehensive social safety net.

### Fiscal policy, support measures, and priorities
- Fiscal response and reach:
  - Policy space and revised debt ceiling to 70 percent of GDP in 2021 allowed strong pandemic response.
  - Social assistance schemes (digital platform e-wallet and national ID database) reached 41 million beneficiaries.
  - Schemes stimulated around 70 billion baht of spending with more than 1.4 million entrepreneurs participating in the Co-payment scheme.
  - Recent measures announced on July 26, 2022 (including new phase of Co-payment scheme and subsidy to state welfare cardholders) to support domestic consumption from 1 September-October 31, 2022.
- Targeted support for inflation impacts:
  - Energy subsidies and price caps on key goods implemented temporarily.
  - Diesel excise tax reduced by 5 baht per litre until September 20, 2022.
  - Support measures now more targeted: subsidies on LPG, cooking gas and electricity.
- Fiscal framework and reforms:
  - Authorities reiterate commitment to fiscal sustainability and Medium-Term Fiscal Framework.
  - Authorities mindful of fiscal cost of temporary measures and would gradually allow more cost pass-through while protecting the poor with targeted measures.
  - Emphasis on tax reform to broaden the tax base, such as VAT from e-commerce.

### Structural policies and development priorities
- Authorities agree on transformation to a high-value economy post-pandemic, supporting new growth drivers and enabling a sustainable and digital economy.
- 13th National Development Plan (2023-2027) presents key development targets.
- Main initiatives:
  - Eastern Economic Corridor (EEC): focuses on investment in 12 strategic industries:
    - Next-Generation Automotive, Intelligent Electronics, Advanced Agriculture and Biotechnology, Food for the Future, High-Value and Medical Tourism, Robotics, Aviation and Logistics, Medical and Comprehensive Healthcare, Biofuel and Biochemical, Digital, National Defense, and Education and Human Resource Development.
  - Efforts to reshape tourism toward higher value and environmental sustainability (including Long-Term Resident Program and development of health and wellness, culture and heritage, and natural environment tourism).
- Priorities:
  - Investment in digital innovation and infrastructure.
  - Productivity-enhancing Active Labor Market Policy (ALMP) to address skill-shortages and skill-mismatches.

*IMF staff report supplementary information for the 2022 Article IV Consultation (Thailand), update as of July/August 2022.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1thaea2022001.pdf_